How Do I Handle a Property I Bought Mid-Year?

What is the source document for a purchase?

The closing statement. Depending on the loan it is a Closing Disclosure, a settlement statement, or both, and it lists every dollar that moved at the closing table. The wire out of your bank account shows one number, and that number is the net of a dozen lines that each belong somewhere different in the books.

So the purchase is recorded once, from the closing statement, as a single entry that puts every line where it goes. The wire is then matched to that entry rather than categorized on its own. Booking the wire as “property” in one lump leaves the balance sheet wrong for as long as you own the building.

What are the pieces of the closing statement?

Most statements break into the same handful of parts.

• Purchase price, split between land and building. Land is not depreciated and the building is, so they sit in separate asset accounts. The split itself is your CPA’s number, recorded as given, never estimated from the tax assessment or a rule of thumb.
• Loan proceeds. A liability on the balance sheet at the full original amount, so the first monthly payment has a balance to reduce. Our mortgage split article covers what happens from the first payment on.
• Earnest money. You paid it weeks earlier, and it should already be sitting in a deposit asset account. At closing it moves from that account into the purchase.
• Prorations. If the seller collected the full month’s rent, your share comes back as a credit and is rent income for the days you owned the property. If the year’s property tax is unpaid, the seller’s share comes as a credit that offsets the bill you will pay later, so the books carry only your portion.
• Security deposits transferred. The seller hands over the tenants’ deposits as a credit. That cash is a liability to the tenants from the day you own the building. Security deposit accounting covers the rest of the deposit’s life.
• Initial escrow deposit. The lender collects a few months of tax and insurance up front. It is cash parked at the servicer, an asset, and it opens the property’s escrow account.
• Title, recording, and lender fees. Some attach to the cost of the property, some attach to the loan, and some are expensed. Which is which is your CPA’s call. We record them in a clearly labeled closing-costs account for that property, hand the statement over, and the CPA reclassifies from there.

“The wire is one number. The closing statement is the dozen numbers behind it, and the books need the dozen.”

What changes because the purchase was mid-year?

The property starts reporting on the closing date, and nothing about it exists in the books before that.

• The first month is partial. The prorated rent credit is the income for the days you owned the property that month. The next full rent payment is the first normal month.
• Give the property its own tag or class on day one. A property in Stessa, a class or location in QuickBooks Online. The year-end P&L for that door will then be a partial-year P&L, which is correct. Five months of history is fine; five months mixed into another property’s numbers is a cleanup job.
• The escrow account starts with the closing deposit. Each monthly payment’s escrow portion adds to it, and the first tax or insurance bill the servicer pays draws it down. Reconcile it to the escrow statement like any other account.
• The deposits stay a liability. If the seller transferred $1,500 in deposits, the books show $1,500 owed to tenants until move-out. If the seller transferred less than the leases say, chase that gap before the first tenant leaves.
• Improvements after closing are separate. Work done in the first weeks of ownership is recorded on its own rather than folded into the purchase price. Tracking capital improvements by property covers how.

What does the CPA need from the closing?

The closing statement, the loan note or first mortgage statement, and the entry as recorded, with the closing-costs account visible so nothing has to be unpicked. From those, the CPA confirms the land and building split, decides which fees attach to basis, and builds the depreciation schedule from the placed-in-service date. The bookkeeper enters the resulting figures as given.

Keep the closing package through ownership and for several years after a sale. Basis starts at purchase and adjusts for every improvement, and the closing statement is the first document in that chain. Landlord record retention covers what else belongs in the file.

The Bottom Line

A mid-year purchase is one entry from one document. Read the closing statement line by line: price into land and building at the CPA’s split, loan into a liability, earnest money out of its deposit account, prorations and transferred deposits where they belong, escrow deposit into an escrow asset, and fees into a labeled closing-costs account for the CPA to sort. Tag the property from the closing date and let its first year be a partial year.

Real Cents Organized is a bookkeeping firm. We record and organize the books; your CPA determines the land and building split, which closing costs attach to basis, the depreciation schedules, and what any of this means on your return.

Frequently asked questions

Do I record the wire to the title company as the purchase?

No. The wire is the net of every line on the closing statement, and categorizing it alone loses the loan, the credits, the deposits, and the fees. Record the purchase as one entry built from the closing statement, then match the wire in the bank feed to that entry. The wire is the cash line of the entry, not the entry itself.

Where do closing costs go in my rental books?

Into a clearly labeled closing-costs account for that property, until your CPA decides which fees attach to the property’s basis, which attach to the loan, and which are expensed in the year of purchase. Recording them there rather than guessing keeps the purchase entry clean and gives the CPA one line to reclassify from the closing statement.

How do I handle security deposits that came with the property?

As a liability from the closing date. The seller credits you the tenants’ deposits on the closing statement, which reduces your cash to close, and you now owe that money to the tenants at move-out. Record the credit to a security deposits held account tagged to the property, then compare the total to the leases. Any shortfall is a question for the seller.